Shopify Stock Drops as Business Model Compared to MLM

It’s been a rough few days for Shopify as their business was compared to notorious MLM Herbalife earlier this week.

On Wednesday 4th October, stock short seller and activist, Andrew left, reported on his website Citron Research, that Shopify’s marketing is in violation of the same FTC rules that landed Herbalife with a lawsuit resulting in a $200 million settlement.

Citron Research sounds grand, but it isn’t a financial institute, it is the evolution of Andrew Left’s original self-published blog StockLemon.com, in which he issued free reports and newsletters on company stocks he considered overvalued.

That is not to say Citron Research isn’t respected or influential: Andrew Left has had his stock reports evaluated by the Wall Street Journal and been invited to speak at Harvard Business School.

The Wall Street Journal found that there was an average share price drop of 42% of those companies Left reported as having overpriced stock in his opinion, and given he focuses on those companies that he considers to be engaged in fraud or deceitful marketing practices, the subjects of his reports have frequently sued.

To date, Left claims that no company in the US has been successful in that endeavour against him.

So he’s not just some chump with a blog, farting up an opinion in whatever takes his fancy: you can take the guy seriously, because the stock market does.

Shopify’s stock fell nearly 12% following Left’s latest report on its business and promotions activities. To put that in perspective, that’s $1.5 billion wiped off their share price. So folks in the know take this dude’s pronouncements real serious.

Here’s Left explaining what his concerns are with Shopify in a Bloomberg interview:

Not My Bag, Man

This sort of subject matter isn’t really the remit of what this blog of mine is about. I discuss making money via a totally different approach, and I don’t pretend to be a stock market expert or be in possession of any advice in that regard. So it’s just as well I don’t have any to give.

But I can read a report and relate to my own experience and analysis (however anecdotal that may be accused of being).

And what Andrew Left is saying, resonates with me. I think he’s right: Shopify is riding the wave of the drop-shipping/get-rich-quick fad, and I’ve said it before.

Drop-shipping

Let’s face it, drop-shipping is how most of us know Shopify. The vast majority of people are aware of it, not because they have a physical store and need a method to increase sales with a Web solution, but because they were sold on a drop-shipping webinar that came cantering into view on their Facebook news feed, ridden by a promise of a life of financial freedom.

Shopify isn’t new, either. It’s been around since 2006 – and despite being valued in the billions, hasn’t actually made a profit in any year as yet.

Shopify didn’t come up with the drop-shipping business model, I don’t even know if it was thinking in terms of that market, or that anyone could have predicted the rise in popularity of that money making ‘scheme,’ but it sure benefited from it.

That drop-shipping became a ‘thing’ as much as the fidget-spinners sold on it, was due to a combination of factors: Facebook, Aliexpress and the same hucksters who’d promote Nu Skin one week, and be an ecommerce guru the next.

Aliexpress was the main one, though, in my opinion. There were other suppliers available previously, and there still are, but Aliexpress is the supplier of choice for drop-shipping.

Amazon and eBay benefited from drop-shipping 1.0 but Shopify ushered in drop-shipping 2.0.

Woocommerce played its part too, but it was harder – it needed experience of WordPress and technical knowledge. You had to be able to setup a website, put all the pieces together yourself or pay someone to do that. It has a barrier of entry to a certain extent.

Shopify threw that all wide open.

You just signed up, and you had a done-for-you and working ecommerce store in as little as an hour.

No payment system hassles, no web designer fees, one simple process and you had a legit store. Or one that looked that way anyway, depending on what your purposes were.

And one that looked exactly the same as half a million other stores using the same free template, but never mind.

But then you still needed something to sell. Creating your own branded product range is expensive and risky. Hooking up with a supplier is easier but many required minimum orders and that still entailed risk. Not to mention that suppliers in themselves for drop-shipping could be risky. There were numerous posts and catalogues warning of cowboys and rip-off merchants, and where to find reputable companies to deal with – these posts are still kicking around on the Web from back in the day.

Some of those sites and catalogues incurred a joining fee too, before you could even begin perusing them just for supplier names, never mind products.

So it wasn’t all that simple to get going in drop-shipping, it needed quite a bit of dedication and perseverance just to get setup.

And Aliexpress removed the final barrier in terms of presenting a supplier who didn’t need minimum orders, wasn’t looking for credit checks or a physical premises or even a website, didn’t care about your eligibility as a long term customer or that you ordered one item or one thousand, all it cared about was that you had the money to pay.

Aliexpress isn’t even the supplier, it’s just the portal to other suppliers willing to sell piecemeal instead of wholesale, and it’s stuffed with drop-shippers itself! A lot of the ‘suppliers’ are using the same product images because they just swiped them from the original producer, and intend going to them once you place your order. Their margins are minimal but they’re doing it with just about everything Aliexpress sells, no website or other costs except buying, and you’ve already bought, so they have the money, and it’s just pass the parcel.

Then you’ve got the hucksters who spotted an opportunity to sell a digital info product, repackaging information from folks who actually were making a few bucks at drop-shopping, hype it all up, and sell it as another tantalising get-rich-quick scheme. That these people could claim riches themselves was never from the execution of their advice in the product, but from selling it.

Much like, as I always say, I could resell Schwarzenegger’s advice on body building, Bruce Lee’s training method, but beyond being able to talk at length on their writings – and sound perfectly legit and knowledgeable – it’d be all theory as I’ve never achieved anything with their advice; too much like hard work.

Put all that together, Shopify, Aliexpress, and the hucksters easy access to you in the Facebook news feed – and Facebook helpfully even targets just the right people they’re looking for as marks – and you get the drop-shipping fad.

The fad Andrew Left objects to.

Shopify’s MLM-like Marketing

Left has a point and he highlights Shopify’s advertising which makes classical scamster claims about becoming a millionaire and quitting your job.

Not a Lottery advertisement

It’s true. Shopify Facebook ads make claims that no one else would get approved: “Become a Facebook Millionaire.”

But Facebook only tends to get ethical when your ad budget is $5 a day, not $5,000.

The drop-shipping courses help push the dream too. I posted just recently on one I liked, but came with the claim of making $0 – $1.1m in its first ever of quarter of trading! Like I said in that post, is that net or gross? Because them Facebook ads cost and you gotta buy the product too first in drop-shipping. James Beattie claims to know drop-shippers posting $300k a month sales figures but still don’t make shit as it all goes on ads to get the sales.

Andrew Left also objects to the advertising for Oberlo, an add-on for Shopify for importing products from Aliexpress, that suggests you don’t even need to have a firm idea for the niche you want to found your store on.

It’s like “create a business in anything, even if you have no experience, and become successful!” The Timothy Marc pitch in other words.

Another beef of Left’s is Shopify’s own Exchange Marketplace, a facility it offers in order to sell your store.

Or have you cling onto it a bit longer, still paying your monthly subscription fees, while you try and claw something back for the investment in the hoped for sale of a ready made, but most likely failed, store.

I’ll be honest with my drop-shipping store, I built it with Woocommerce, using a pre-existing hosting package I have with SiteRubix, that allowed me multiple sites and a SSL certificate for each and everyone of those sites. I dabbled by my own admission, I still have plans for that site, but I haven’t really looked at it in the last four months. I had that luxury as it wasn’t costing me anything. The same hosting covers this site so it wasn’t a loss, I was still getting value. I wouldn’t have been able to say that, though, if I was paying out $29 for the basic Shopify plan every month and neglecting it.

But if I was, then the idea of maybe making some of that back, not to mention the ad spend on failed products, via a Shopify Exchange sale, might well get another couple of months subscription out of me.

Not that my twenty-nine bucks is going to make or break Shopify, but there’s four hundred and fifty thousand other people more or less in the same boat according to Andrew Left.

Shopify’s Customer Base

Left references Shopify’s own CEO Tobias Lutke in an interview with Bloomberg in which he states that Shopify is home to 500,000 merchants. Of those, 2,500 are on the “Plus” plan, which requires the sort of heavy-duty support you’d associate with a serious retail outlet dealing with substantial traffic and sales. Left then guesstimates another 20,000 or more users as being on the “Advanced” plan, so that being the case he reckons that leaves some 450,000 as Basic to ‘regular’ price plan subscribers.

And Shopify won’t release figures for “churn” which Left says is Shopify’s “Dirty little secret.”

That’s the turnover rate of customers; the numbers joining and leaving every month.

Left says this is an obvious problem for the company and the reason why it instigated the Exchange Market.

Which if you take a look at the top revenue earning sites up for sale on it, you can see a ‘crash & burn’ cycle being repeated in all of them.

Left cites “Head Over Heels Couture” as at time of posting, it’s currently the highest priced Shopify store at $875,000(!). These are its sales and visitor stats:

What those stats say to me is maybe not so much crash and burn re the product or market, but for whatever reason, the store stopped advertising – and as soon as it did, sales crashed.

I would guess they probably stopped advertising, because as previously said, they weren’t making any margin on it.

$1 million in sales isn’t so impressive if you have to spend $995k to get it.

This is the bugbear of drop-shipping, and a conversation that dominates all drop-shipping groups: making Facebook ads profitable.

So much so, that a whole other industry purporting to do just that, make Facebook ads work, has sprung up around drop-shipping and is thriving.

Most of the ‘experts’ being hucksters who spotted an opportunity, too, it has to be said.

And there’s also a whole industry of creating and (trying to) flipping Shopify stores as well.

Shopify’s Churn

So what does Shopify’s churn rate mean for the business?

According to Andrew Left, it means it’s unsustainable.

He says that as half of Shopify’s revenue is not from its monthly paid plan subscription fees, but lower margin revenue from merchant solutions i.e. card and payment fees.

He also points to the Shopify Partner program, that encourages members and non-members, to recruit people to the service.

Left feels this is all very MLM-like, that you can make more from promoting and recruiting people to join Shopify, than you can from actually trying to run a successful store on the platform.

He highlights one time Herbalife huckster Keder Cormier (“From Beginners to Millionaires”) who uses the hardsell of presenting a luxury lifestyle as the reward for creating a successful drop-shipping business on Shopify.

Like a MLM, once the recruitment slows or ceases, Shopify will crash – because no recruitment means no subscription fees and no percentage take on what little they can sell via their store – which as above accounts for half of their revenue.

Or at least Shopify’s share value will crash even if the company doesn’t immediately.

Because drop-shipping could well be a fad. I don’t know if it’s here to stay or if something else will replace it.

There’s already Vick Strizheus advocating another way with his ECOM Entrepreneur but I suspect that approach is still advocating Shopify as the medium by which to sell, so even if your own brand takes over from generic Aliexpress items, Shopify won’t be going anywhere and still benefiting.

As will Aliexpress as the initial products will be selected from that site, or at least the suppliers will be.

Good for Andrew Left

As Left bets on short stocks, if he’s right then all this is very good for him, as he’ll make money from it.

He’s been right a lot too.

To help things along he’s also submitted a report to the Financial Trading Commission (FTC) calling for a Herbalife-like investigation into the marketing practices of Shopify and its claims.

Personally, I think he’s on a lot weaker ground when it comes to levelling a charge of ‘fraud’ at Shopify as opposed to something like Herbalife.

Shopify has attracted the used car salesmen hucksters to its promotion, and it’s certainly benefited from their efforts that’s for sure, and maybe it hasn’t done itself any favours by adapting its advertising to appear to support the line of these marketing sharks, but I still think Shopify is a long way from being a Herbalife or a MOBE: the product is actually of use and a genuine ecommerce vehicle.

But I think you can make more with it than you can with MOBE, and for a lot less in the pay-to-play stakes.

You can go into drop-shipping, as the model is currently touted, and not lose too much if you just dabble.

The same can’t be said for MOBE et al.

If you take out a subscription to Shopify, and your idea fails, it’s not really their fault, as their remit is just to provide you with a stable platform with which to sell from. Maybe drop-shipping doesn’t work, but Shopify isn’t just there solely to supplement that sales model.

Even if it can be argued that its growth and share value has relied on it.

MOBE on the other hand is the idea and the platform, and you’re selling the platform, not using the platform as a means to execute an independent business idea.

You don’t join Shopify primarily to sell Shopify in other words.

Shopify and Users Respond

“We vigorously defend our business model and stand resolutely behind our mission and the success of our merchants,” Shopify said in a statement to CNBC.

In Shopify’s additional defence, the Irish Times reports that back in August of this year Chief Operating Officer Harley Finkelstein “readily admitted that many businesses on the platform fail, but said the point of the company is to make it easy and cheap for merchants to experiment with new ideas and eventually find success.”

“We’re not changing physics here, some small businesses simply don’t work,” Finkelstein said. “But the ones that do succeed will stay with us for a very long time.”

I’ve been unable to find a link citing the original source for that but it sounds credible.

On Facebook groups and ecommerce forums users have been defending the platform against charges of MLM-like practices, which is perhaps not too surprising, but again in Shopify’s defence, I can’t say I’ve really felt they push recruitment of the service; no more than web hosts do i.e. the affiliate program is there if you want to join, and they tell you how best to go about making the most of it, but I’ve never seen anything that says to make misleading claims.

Even if Andrew Left is saying that’s exactly what Shopify does.

Final Thoughts

I think Left could well be right (and he often is) that Shopify’s share price is overvalued, but haven’t folks also been saying that about Facebook, Instagram et al for years?

Okay, seems they were right about Twitter, but all the social media giants are still around and don’t look like they’re going to be usurped any time soon.

Shopify is certainly the out-of-the-box ecommerce platform giant, but whether its future is shakier I don’t know.

I’ve used Shopify, and if you’re not computer literate it makes sense to use it. I really couldn’t advise going off and attempting to learn what all’s required with WordPress and Woocommerce, not when you need an immediate solution, which is what Shopify is.

If I wanted a quick store, like within an hour, I’d use it myself.

But it’ll be interesting to see how all this plays out. I suspect Shopify will reign in some of its “become a millionaire” rhetoric in its advertising, but beyond that will carry on as normal as this report by Andrew Left recedes into the distance as yesterday’s news.

It remains to be seen if the FTC will deem the information grounds to initiate an investigation, and if they do, these things never progress at a fast pace.

But, while like I said, this isn’t really a financial market blog, Shopify and MLMs are certainly a topic for discussion around here, so I think this news piece is worth highlighting.

Wealthy Affiliate

If making money online interests you, and if you’ve read this far it obviously does, then take a look at Wealthy Affiliate.

It’s not drop-shipping, though ecommerce is addressed and discussed within the membership community, it’s (as the name suggests) affiliate marketing.

That’s affiliate marketing of the SEO type, not the Clickbank pay to drive traffic to a product variety. Thus a lot less hard on the pocket and risk.

I play the drop-shipping game and you have to pay-to-play at that. No way around it, you’re gambling on Facebook advertising at the very least. With affiliate marketing, it’s the longer game, requires more patience, and is definitely not a get-rich-quick scheme.